Theme 4. International commercial terms (incoterms) in international contracts

The Incoterms families (E, F, C, D)

The Incoterms categories (the Incoterms of sale at departure; the Incoterms of sale at destination; the DAF Incoterms)

 

The Incoterms families (E, F, C, D)

Incoterms (International Commercial Terms) are aimed at regulating the commercial terms most commonly used in international trade by defining each one with a single term, which will be understood equally throughout the world, a certain relationship between client and seller. Their use reduces misunderstandings and disputes between buyers and sellers.

They were set up by the International Chamber of Commerce (ICC) in 1936 and are regularly revised. They are aimed at regulating:

• the sharing of the costs;
• the risk transfer.

Incoterms are defined by initials and put in three categories:

• the Incoterms concerning sale at departure (E, C and F families) in which the main transport risks are born by the buyer;
• the Incoterms concerning sale on arrival (D Family) with which the costs and risks of the main transport are born by the seller;
• the DAF Incoterm, in which the seller bears the risk until a given border, beyond which the buyer takes over.

Incoterms 2000 families are characterized at the table 4.1.

Table 4.1.

Incoterms 2000 families

Groups	Modalities	Incoterms 2000
E	The seller puts the goods to the disposition of the buyer in his own premises.	Ex works(EXW)
F	The seller remits the goods to a designated carrier. The buyer assumes the expenses and risks of the main transportation.	Free Carrier(FCA) Free Along Side Ship(FAS) Free On Board(FOB)
C	The seller assumes the expenses but don't support the risks incurred during the main transportation.	Cost and Freight(CFR) Cost Insurance and Freight(CIF) Carriage Paid To(CPT) Carriage,Insurance Paid To(CIP)
D	The seller supports all expenses and the risks that driven the routing of the goods until the place of destination	Delivered At Frontier(DAF) Delivered Ex Ship(DES) Delivered Ex Quay(DEQ) Delivered Duty Unpaid(DDU) Delivered Duty Paid(DDP)

 

The distinction between the families E, F, C, and D of the Incoterms is very important when commodity is damaged during the transportation.

 

Example: A Cameroonian company sells a product to a French company. During the transportation by sea, commodity is destroyed.The salesperson filled his contract obligations if the contract is concluded according to an Incoterm of the C group (that is to say CFR, CIF, CPT or CIP) group. On the other hand, in case of use of an Incoterm of the D group (DAF; DEQ; DDU or DDP), it didn't execute his contract since the product didn't arrive to the point of agreed destination.

 

The choice of an Incoterm is the result of a commercial negotiation, as well as the organisational experience of the firm, and of external factors such as the market tendencies and competitor's practices. As this choice shapes the entire transport contract, it is important to respect certain recommendations.

The points to bear in mind when using Incoterms are as follow:

• ensure you are familiar with the meanings of each of the Incoterms and their acronyms;

• the use of Incoterms is optional (no law renders them compulsory). To use them, the parties must clearly refer to them in the sales contract and refer the agreed location. For example: CIF Le Havre, 2000 ICC;

• incoterms have variants which can lead to confusion. Pay attention to how they are used, if not, you might lose all the benefits from referring to Incoterms. Example: FOB in the USA has six different interpretations;

• use the reference place (port, border, etc.) alongside the initials, without this information, the Incoterm is meaningless. Examples: FOB must always include the chosen port, DAF must always include the border concerned;

• bear the method of transport in mind. Not all Incoterms can be used for all methods of transport. E.g.: for an overland delivery, the term FOB is inappropriate;

• the Incoterm does not regulate the transfer of ownership of the goods, but only that of risk and costs between buyer and seller. The transfer of ownership is regulated differently depending on the laws of different countries;

• any amendments to the obligations in a certain Incoterm must be clearly stated next to it (e.g.: DDP SINGAPORE VAT unpaid - ICC 2000 Incoterm);

• when the parties stipulate different conditions to those in the official Incoterm, it is the content of the contract which prevails;

• in the case of purchases at departure, it is important for the client to check that transport insurance has been taken out by the seller if it is required in the Incoterm (only the Incoterms which mention insurance imply its underwriting!), or the commercial contract. If not, it will be done by the buyer;

• the choice of an Incoterm designates the level of service that your source will uphold, or which you will supply your client with. It is therefore obvious that merchandise will be sold or bought at largely different prices depending on the Incoterm. Bear this in mind during negotiations and when making an estimate!